In the prior edition of this article I explored Auckland International Airport (ASX: AIA) (“AIA”), which screened undervalued at the time at $6.84 per share (30/9/24). AIA’s share price has since appreciated almost 16%. We are still bullish however and have raised our fair value for this high-quality asset as we believe Auckland Airport will maintain their competitive advantage for longer.

AIA formed part of a podcast episode where Morningstar’s Mark LaMonica and James Gruber discussed ASX shares to buy and hold forever which explored how the list was formulated.

Auckland International Airport AIA ★★★★

  • Moat Rating: Wide
  • Share Price: 7.86 (22/01/25)
  • Fair Value: $8.60
  • Price to Fair Value: 0.9 (Undervalued)
  • Uncertainty Rating: Low

AIA had a troubled first half of 2024 with the share price tumbling 14% after investors grew wary of the looming NZD $7 billion capital expenditure plan and its dampening effect on cash flow. Luckily the latter half of the year reinvigorated spirits with the price rising 11%, leaving the company 3% down in the year overall.  

aia share price chart
Source: Morningstar. 2025.

Defence worthy monopoly

Gruber states that “airports are generally fantastic businesses as they’re often monopolies with pricing power”. Morningstar analyst, Angus Hewitt, echoes similar sentiments for the defensive asset, citing that current prices may indicate markets are overly concerned about the planned uptick in capital expenditure.

Thanks to its near-monopoly position in a stable regulatory environment, AIA carves itself a wide moat with its current investment program solidifying its position as New Zealand’s primary gateway for decades to come. We do not believe a second major airport is likely to emerge given AIA’s multi-decade expansion potential. Consequently, return on invested capital (“ROIC”) is set to lag the weighted average cost of capital (“WACC”) in the medium term however returns are expected to exceed WACC by the conclusion of the decade and beyond.

AIA also has efficient scale as the sole major jet airliner hub in Auckland, the most populated city in New Zealand (4x larger than the next city on the list). Despite airports being regulated assets, the company is free to set fees with airlines to earn a suitable return on its “regulated asset base”. However, returns can lag as price-setting events only occur approximately every five years meaning that capital projects can’t be priced into fees until the next pricing reset.

Given that price-setting is independently reviewed to determine a “reasonable” return rate, there isn’t material upside to ROIC for regulated business. A draft report from independent commission indicated that AIA’s target return is higher than it deems “reasonable” meaning that aeronautical prices could drop from fiscal 2026. Rather, profitability is generally higher in the unregulated part of its business (retail and property segments) rather than its aeronautical operations.

Low risk asset

AIA operates an effective monopoly in New Zealand awarding it a low uncertainty rating. Rival airports are currently unsuitable as international landing leaving no looming competitors in the horizon. The primary risk posed are vulnerability to macro events such as health epidemics, geopolitical tension and economic risk. A passenger traffic slowdown would also affect the business however the firm has flexibility with capital deployments to reduce the risk of overcapacity.

Tourism in New Zealand is currently hovering at ~85% of pre-covid levels at just 3.3 million arrivals in 2024 (total to November 2024). The outlook for future travel remains mixed after the government recently piled on fee hikes for tourist and working holiday visas. Nonetheless, Morningstar expects recovery in passenger numbers to pre-covid levels by fiscal 2026 and low-to-mid-single-digit passenger growth thereafter.

Balance sheet concerns

Whilst debt metrics have been appropriate, AIA’s balance sheet remains weaek. An eyewatering NZD $7 billion capital expenditure project has just begun which will constrain the firm’s free cash flow for the next few years. Following the ZND $1.4 billion raise, the balance of expenditure should be funded by additional debt facilities and earnings.

Share price and valuation

Hewitt raises his fair value estimate by 19% to $8.60 per share. The raise is sparked by the increase in duration for which we think the airport can maintain its competitive advantage as well as smaller increases in retail and car park revenue offsetting lower aeronautical charges.

This valuation implies a EV/EBITDA multiple of 24x and a dividend yield of 2%. Average annual revenue growth is forecasted at 12% for the five years to fiscal 2029. We also forecast an average annual operating earnings growth of ~25% over the same period. Earnings from new projects will likely take years to come online.

Should you own it forever?

Auckland Airport is set to benefit from rising air travel to New Zealand, boasting ~75% of the country’s international arrivals and departures. The substantial development opportunities expand capacity to capture up to over 27 million passenger movements per year by 2033. Given the lack of competitors, Auckland Airport is likely to enjoy steady cash flows as the primary gateway to New Zealand.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn more about how to identify companies with an economic moat, read this article by Mark LaMonica.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.